MICHAEL: MIDSIZED RETAILERS FACE 'STRUGGLE'

ROSEMONT, Ill. -- The biggest and the smallest retailers have the best chance of survival in today's economic environment, said Gary Michael, former chairman and chief executive officer of Albertson's, Boise, Idaho, keynoting the Private Label Manufacturers Association show here last week.The medium-sized retailers -- defined by Michael as having an annual volume of $2 billion to $3 billion -- will

ROSEMONT, Ill. -- The biggest and the smallest retailers have the best chance of survival in today's economic environment, said Gary Michael, former chairman and chief executive officer of Albertson's, Boise, Idaho, keynoting the Private Label Manufacturers Association show here last week.

The medium-sized retailers -- defined by Michael as having an annual volume of $2 billion to $3 billion -- will have the most trouble competing as Wal-Mart expands its supercenters and big chains like Albertson's respond with newer and bigger stores, he said. Michael retired from Albertson's in June.

"I think the medium-sized companies are going to continue to struggle," he said. "That's where a lot of consolidation has come about.

"Today, those are the companies that are having the toughest time making decisions about what to do."

For example, a store faced with Wal-Mart supercenter competition can expect to lose 6% to 7% of its volume each year. "That's pretty hard to replace," he said. "What happens is, you are getting squeezed and you can't shrink your costs fast enough, and you don't have enough capital to replace the volume. That's the arithmetic of medium-sized companies."

Big chains have that kind of capital and small independents have more flexibility to roll with the punches, he said.

For the bigger chains, "big means having a strategy to replace the volume." For example, he noted, Albertson's may build 100 stores in a year, but 50 of them are to replace smaller units that are encountering new competition.

"I think being medium-sized in the retail business is tough," Michael said. "But if you are small, you can survive and do very well.

"Big animals don't move very fast, but they also don't die very easily.

"As a small player, you can figure out ways to get around the bigger animals."

However, it's not just the supercenters that are cutting into supermarket sales, he noted.

"All of our analysis shows that more business is lost to formats not in our business than to direct competition. Fast food, gas stations, convenience stores -- people have choices," he said.

Reflecting on the wave of consolidation in the food industry, Michael said, "most people think that life after consolidation is not much fun." The Albertson's-American Stores merger was difficult at first, but is now running smoothly, he added.

The current economic situation is making life "pretty tough for everyone," he noted. "There are not many places in this world economy where companies are running downhill with the wind at their back.

"In fact, it feels like the opposite to most of us, and consolidation is only one of the factors."

In discussing consolidation, he noted that scale is important "and that's why all of us did the deals that we did. But only if it is used prudently and brings efficiencies and investment opportunities," he said.

But as consolidation continues, smaller players will fill the voids left by the big companies. "My motto at Albertson's was we either had to have lunch or be lunch," Michael said.

Turning his attention to private-label products, Michael said there is a need for more innovation and less duplication.

"You can survive if you can provide innovation," he said. "We need new thoughts. We need new ideas.

"But you won't find new thoughts and new ideas in the competitors' stores."

He brought back the idea of offering wrap sandwiches after finding them in a food-service situation. "You find these things in places that are not your competitors' stores," Michael said.

"When you find something that works today, you have to build it fast. You can't test-market things the way you used to," he said.

One of the biggest conflicts when it comes to private label is variety vs. duplication. For example, a store doesn't need eight different stockkeeping units of the same type of pasta sauce. "You need to be complete category by category. You need to have variety and you need to avoid duplication."

In evaluating the various retailers and their private-label efforts, Michael said Wal-Mart and Albertson's are the biggest buyers of private label because they don't have their own manufacturing plants.

On the other hand, he complimented Safeway and Kroger for doing an "outstanding job" in private label because they do manufacture the private label products they sell.

Costco and Wal-Mart could well end up selling almost nothing but private-label products, he said. Costco will do this because it is trying to differentiate itself from the competition, and Wal-Mart because it is trying to offer consumers the best value equation, Michael said.

"Marketing and selling products is about what people want to buy, not what you want to sell them," he observed. "This is where most companies -- especially big companies -- get confused.

"Being good at selling private-label merchandise is not about making it, it's not about buying it cheap or how many items you have. It's about innovation, it's about variety, it's about quality, it's about building brand and giving people additional choices."